RBNZ rate increase tough for dairy farmers but good for savers

New Zealand dairy farmers are concerned about the high currency and interest rates.
Photo: Bloomberg

by
Luke Malpass

Kiwi dairy exporters are struggling with the high New Zealand dollar but savers and importers continue to win from the Reserve Bank of New ­Zealand’s decision to lift the official cash rate.

The RBNZ announced a quarter-percentage-point increase in the official cash rate (OCR) to 3.5 per cent but signalled further rate rises were unlikely because of the ­slowing economy.

The New Zealand dollar fell more than a cent to US85.80¢ after the announcement on Thursday.

“With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is ­unjustified and unsustainable and there is potential for a significant fall," RBNZ governor
Graeme Wheeler
said.

“It is prudent that there now be a period of assessment before interest rates adjust further towards a more neutral level," he said, in late ­afternoon trading.

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The RBNZ’s view that the exchange rate will drop from its current ­“unjustified" level will be a relief to farmers but the immediate rise in the cash rate to 3.5 per cent will hurt, as the continued high exchange rates squeeze exporter margins.

"There is a lot of concern about exchange rates and interest rates," Federated Farmers of New Zealand general policy manager Nick Clark said.

In common with Australian exporters, there “is frustration that with the fall in commodity prices, the exchange rate hasn’t come back as expected", he said.

Dairy prices have fallen about 35 per cent since the start of the year.

“We thought there was probably a case to keep the OCR on hold today," Mr Clark said on Thursday, citing weaker economic indicators and falling ­commodity prices.

It is not only the exchange rate that exporters are concerned about but also the effect of the OCR increase on ­interest bills.

“Part of the concern is the interest bill farmers will have to face. There is about $NZ53 billion ($48.7 billion) of debt in the farming sector, two-thirds of which is in the dairy sector and about half of that debt is held by 10 per cent of dairy farmers," Mr Clark said.

Of further concern is the all-important Fonterra milk solids payout price (the farmgate price Fonterra pays for a kilogram of milk solids), which looks to have fallen dramatically ahead of its announcement after next week’s Fonterra board meeting.

“It’s looking more likely to be about $NZ6 [from $8.40 last year]," Mr Clark said. “For a highly leveraged dairy farmer, $6 is about the break-even point once interest is paid."

The concern is shared outside of the farming sector.

“Dairy prices are down around 35 per cent since January and forestry is weak," ANZ New Zealand senior ­economist Mark Smith said.

“Exporters will be very quietly cheering [the likely halt in rate hikes] from the sidelines, although the currency is very high and unjustified," he said.

There was also concern that the rate increase would hit the sector early as a high proportion of dairy farmers were on short-term interest rates “which will be passed through pretty quickly", ANZ New Zealand’s rural economist, Con Williams, said.

On the other side of the ledger, importers, savers and overseas travellers are supported by the New Zealand dollar.

“In the context of the longer-term average, it is still very favourable for the import sector," Mr Smith said.

Interest rates are also getting better for savers in New Zealand, at the expense of borrowers.

“Borrowers will be paying a bit more, as we’ve seen some rates going up. We could well see pressure on deposit rates going up," Mr Smith said.